The Informal Sector
"Yes, but … "
Attitudes towards the Informal Sector
Hari Srinivas

For local governments who are responsible for the development and management of cities in developing countries, the informal sector represents a dilemma. It presents both advantages and disadvantages that need to be taken into account when designing policies targeted at the sector.

Some of the typical attitudes and statements heard with respect to the informal sector are discussed below.

Yes … it generates income for low-income families
With the multitudes of rural families migrating to cities either due to lack of opportunities in rural areas, or in search of a better job in cities, the formal sector finds it difficult to offer jobs to the migrants. It is ultimately the informal economic sector that absorbs these migrants and provides them with opportunities to find jobs, create entrepreneurship and raise incomes in comparison to rural levels.

Yes … it helps find solutions in the absence of formal processes
With inefficient and overwhelmed municipal and public services, local governments and public institutions are hard pressed to provide even basic services to low-income slums and squatter settlements. In such cases, the informal sector responds to such basic needs by converting it into a market opportunity, even for infrastructure needs such as water, electricity, toilets etc.

Yes … it keeps low-income groups occupied with jobs and housing, in the absence of local governments capacities and resources.
Slums and squatter settlements are an integral and inevitable part of most cities in developing countries. On one hand they represent shortcomings in both the public sector institutions (including local governments), and the migrants themselves; on the other, they represent the need and desire of migrants to invest in improving their life. A house is a fundamental/basic need, and very few opportunities and alternatives are available to the very poor. Local governments are politically hard pressed to provide necessary services and infrastructure to a group they essentially feel "does not contribute to the city's economy". The urban informal sector steps in again to provide the necessary services informally (albeit sometimes illegally) whether it is land parcels, building materials, labour etc.

But … few, if at all pay taxes: difficult to provide services/facilities
It is true that low-income groups do not pay any taxes - whether residential, business or income tax. This makes local governments reluctant to provide services or facilities to such groups, particularly in face of the 'fear' that this may attract more migrants to the city. Despite the lack of capacity of low-income groups to pay taxes, they are however an integral and important part of the urban economy, providing a smooth continuum of cost-effective products and services to urban residents on a daily basis. A scalable system of fees and at-cost contributions for public services provided (such as toilets) should be upgraded to regular taxes as the groups improve their income levels and standard of living and move out of slums.

But … they pollute and generate waste
This is true though the situation is no different from any average middle-class family. Comparatively, however, they produce much less wastes and recycle most waste where possible (or release it back into the informal economy for another enterprise). It is also important to realize that the pollution and waste generation by the informal sector may be more 'visible' as they are not generally served by formal urban infrastructure networks, or urban garbage services.

But … they block streets and hawk
The first thing we need to recognize with respect to the informal sector is that they provide important, daily services for the smooth functioning of a city. From laundry service and vegetables, to flowers and haircuts, informal enterprises (whether a one-man enterprise or a family enterprise) respond quickly to market needs and consumer demands, much more so than formal enterprises. The problem arises when these contributions to the urban economy are not recognized and no clear policies are made by the local governments or other formal entities - even if these policies/initiatives are ad hoc and 'informal' themselves.

But … they squat on land that has other utility uses
Evidence from cities in most developing cities show that informal housing and enterprises usually squat on marginalized and vulnerable lands that are not attractive to other users or developers. These include marshlands, river banks, hill sides, and buffer areas around railway lines or expressways. Besides, living densities in these areas are much higher than those achieved in the private or formal sectors (albeit, these levels may not meet minimum comfort standards).